Principles of Islamic banking and finance/PIBF201/Fixed income Islamic modes of finance/Ijarah Muntahiyya Bittamleek

Ijarah muntahia bittamleek (ijarah ending with ownership transfer) is a form of ijarah that concludes with passing the legal title in the leased property to the lessee at the end of the lease tenor. It is similar to conventional financial lease. It is also called ijara wal iqtina. It is a lease contract with promise to sell. It aims at transferring the legal title or ownership to lessee

It is different from simple ijarah (or operating lease as you have learnt in the last section) as the asset is leased to the lessee with both lessor and lessee agreeing to the transfer the ownership of the asset to the lessee at the end of the leased period.

Unlike simple ijarah or operating lease where the lessor has considerable risk to bear, in Ij.M.B, the lessor has no risk except the risk of default same as in a loan. This new Islamic financing mode has been created on the pattern of conventional lease financing. However, as the role of interest is so obvious in the conventional financial leasing,

Islamic scholars have tried to find ways to remove that stigma. From Islamic law point of view two things are not allowed: The sale of a debt and the combining of two contracts into one. In conventional financial leasing, the main feature is that the lessor is actually financing the purchase of the asset; the asset itself becomes collateral by delaying the ownership to the lessee until she pays the full amount of financing for the purchase of the asset as well as the payment of interest. Unlike the operating lease, the lessor or better called the financier has very limited liability. The insurance for any possible damage to the asset is also the responsibility of the lessee.

In Ij.M.B. the periodic payment is called rent instead of interest and an understanding is reached that another contract will be signed at the end of the leased period for the transfer of ownership. This second contract can take a number of forms that are given below:

Forms of Ijara Muntahia Bittamleek (Ij.M.B.):

In this section we consider the following forms of Ijara Muntahia Bittamleek:

1. Ijara Muntahia Bittamleek through gift.
2. Ijara Muntahia Bittamleek through a token amount.
3. Ijara Muntahia Bittamleek through amount specified in the lease.
4. Ij. M. B. through price equivalent to remaining Ijara instalments.
5. Ijara Muntahia Bittamleek through gradual transfer of title.
6. Ijara Muntahia Bittamleek through sale & leaseback.

Ijara Muntahia Bittamleek through gift

• The legal title of the asset is transferred free as a gift.
• Legal title of asset is transferred conditional on settlement of instalments.
• Transfer of legal title of asset is at the end of Ijara period.

Ijara Muntahia Bittamleek through a token amount:

• An executable contract wherein rent of asset and Ijara period are fixed.
• It has a promise to enter into sale contract.
• Sale contract is to be concluded at the end of Ijara period, if the lessee wishes and has paid the agreed token amount.
• The token amount should be agreed mutually by both parties.
• Rent should be adjusted if lessee fulfilled his obligation but the legal title is not transferred.

Ij. M. B. through amount specified in the lease contract:

It is a contract that includes:

• Ijara or lease contract.
• Promise to enter into sale contract.
• The sale contract includes the price {value} of the sold asset.
• Payment of the sale price of asset is after the expiry of Ijara period.
• Lessee is entitled to ownership of asset after paying the agreed specified amount.

Ij. M. B. through price equivalent to remaining Ijara installments:

This arrangement includes:

• Ijara contract.
• Promise to transfer legal title of the asset any time lessee wishes.
• Transfer for amount equivalent to remaining Ijara installments.
• It is an Ijara contract until the title of asset is transferred to lessee.
• Ijara contract elapses for the remaining period when the title of asset is transferred to lessee.
• A sale contract is needed to make the transfer of title of asset effective.

Ijara Muntahia Bittamleek through Gradual Transfer of Title

This arrangement includes:

• Lease or sale contract.
• Promise to transfer the legal title gradually during Ijara period.
• It requires determination of asset price {asset value} in sale transaction.
• Price of asset is allocated over the period of Ijara.
• It requires specification of rent for the leased asset.
• Time title of the asset is transferable through Ijara duration.
• Full transfer of title at the end of Ijara period.
• Gradual title transfer needs sale contract for each transferred portion.
• Rent should decrease as lessee acquires a share in the leased asset.
• If the contract is revoked, then the asset is jointly owned. This is fairness to lessee.

Ijara Muntahia Bittamleek through Sale and & Leaseback:

• Arrangement of selling an asset to another party and then leasing it from him.
• Sale transaction must not be conditional on the execution of the lease transaction.
• However, both parties can have common understanding between them.
• Also it is permissible if one party promises the other to lease to / from him the asset.